TMI Blog1986 (2) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... wing expenditure of Rs. 52,555.50 incurred towards issue of bonus shares by the assessee holding the same as expenditure of capital nature? " At the instance of the Revenue : " (3) Whether, on the facts and in the circumstances of the case, the figure arrived at by computation under rule 19(5) was to be added to the figure arrived at by computation under rule 19(1) for determining the average capital employed in the assessee's undertaking for assessment years 1966-67 and 1967-68 ? (4) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that the expenditure of Rs. 59,331 incurred by the assessee on repairing and reconditioning the existing room to accommodate I.B.M. machines was of a revenue nature and not of a capital nature for the assessment year 1966-67 ? (5) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in allowing development rebate at 35% on the PVC compound plant and PVC processing plant for assessment years 1966-67 and 1967-68 ? (6) Whether, on the facts and in the circumstances of the case, the assessee is entitled to rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds the issue of bonus shares by the assessee company in the assessment year 1967-68. The details of this expenditure incurred by the assessee-company are as under: Rs. 1. Fees paid to the Registrar of Companies, Ahmedabad, for increasing share capital 17,250.00 2. Expenditure incurred for stamp duty on Rs. 87,500 ordinary shares at the rate of 25 paise per share 21,875.00 3. Purchase of 10,334 revenue stamps each of 25 paise 2,583.50 4. Cost of stationery and service charges of computer machineries. 10,847.00 ------------------------- Total 52,555.50 ----------------------- The assessee which is a public limited company had issued bonus shares to its shareholders and the aforesaid expenditure was incurred in connection with the issuance of these shares. The assessee-company claimed deduction of the said expenditure claiming it to be expenditure of revenue nature. The Income-tax Officer was of the view that the expenditure was of a capital nature and, therefore, deduction could not be allowed as claimed by the assessee-company. The Appellate Assistant Commissioner disagreed with the view taken by the Income-tax Officer and held that the expenditure was of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in the said dictionary is as follows : " 1. The issue to present stockholders of additional shares of Corporation's capital stock without changing the amount of paid-in-capital application to outstanding shares. It may be accomplished by calling in outstanding shares and issuing in their stead a larger number of shares each with a lesser par value; or as additional number of no-par shares may be issued pro rata to existing stockholders. Where outstanding shares are called in and fewer shares issued in their place, the transaction is known as a revenue split up. A transfer of paid-in surplus to capital stock account, accompanying the issue of additional shares, does not alter the character of a split up, but a transfer out of retained earnings (earned surplus) causes the issue to take on the appearance of a stock dividend, unless the amount so transferred is small in relation to the fair value per share of the stock outstanding. " It was urged that by issuance of bonus shares, in effect and substance what is done by the assessee-company is to utilise the accumulated profits for its business in a different form. What was with the company as accumulated profits was now availab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -sheet. Mention must be made of the number and the amount of shares issued as bonus shares and the source from which the bonus shares have been issued." It would thus appear that the assessee-company was first required to debit profit and loss appropriation account and credit the bonus to the shareholders' account. Thereafter, it was required to debit the bonus to the shareholders' account with the total amount and credit share capital account with the nominal value of shares issued. Therefore, though bonus was not actually paid to the shareholders, it was credited to the shareholders' account. It was only after the bonus was so credited that it was debited to the shareholders' account and credited to the share capital account. The argument advanced on behalf of the assessee-company that accumulated profits out of which the bonus shares were alleged to have been issued has all along remained with the assessee-company and that as a result of issue of bonus shares all that has happened is that these profits got converted into paid-up share capital, therefore, cannot be accepted. The accumulated profits first went to the shareholders in the form of bonus and then this bonus was bro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The question whether expenditure incurred for issuance of right shares is allowable as revenue or business expenditure came up for consideration before this court in Shree Digvijay Cement Co. Ltd. v. CIT [1982] 138 ITR 45. That was a case in which the assessee company had incurred expenditure of Rs. 11,815 for issue of right shares and claimed deduction of the said expenditure as business expenditure. According to the assessee-company, the expenditure was incurred for procuring finance for the purpose of business and, therefore, it was allowable as business expenditure. The Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal rejected the claim and held that the expenditure was of a capital nature. This court held that the shares issued by the assessee-company constitute its capital and that they were an integral part of the permanent structure of the company and were not in any way connected with the working capital of the company which is utilised to carry on day to day operations of the business. Agreeing with the view taken by the Allahabad High Court in Upper Doab Sugar Mills Ltd. v. CIT [1979] 116 ITR 928, the Himachal Pradesh High Court in Mohan Meaki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be any doubt that as result of the increase in the paid-up share Capital, the creditworthiness of the assessee-company would increase. These are, in our opinion, benefits or advantages of enduring nature derived by the assessee-company as a result of issuance of bonus shares. We, therefore, do not agree with Mr. Patel that no benefit or advantage whatsoever is derived by the assessee-company by issuance of bonus shares. But apart from that, as observed above, the bonus shares are an integral part of the permanent structure of the assessee-company. Strong reliance was, however, sought to be placed on the decision of the Supreme Court in India Cements Ltd. v. CIT [1966] 60 ITR 52, in support of the assessee's claim that the expenditure was revenue expenditure. That was a case in which the assessee-company had obtained a loan of Rs. 40 lakhs from the Industrial Finance Corporation secured by a charge on its fixed assets. In connection therewith, it spent a sum of Rs. 84,633 towards stamp duty, registration fees, lawyer's fees, etc., and claimed this amount as business expenditure. The Supreme Court held that the amount spent was not in the nature of capital expenditure and was lai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Indian Income-tax Act of 1922. Macleod C. J. of the Bombay High Court, dealing with the claim, observed (at page 132 of I ITC and at pp. 59 and 60 of [1966] 60 ITR 52: " If then it is admitted that the cost of raising the original capital cannot be deducted from profit after the first year, it is difficult to see how the cost of raising additional capital can be treated in a different way. Expenses incurred in raising capital are expenses of exactly the same character whether the capital is raised at the floatation of the company or thereafter : Texas Land and Mortgage Company v. William Holtham [1894] 3 Tax Cas 255 ". He further observed (at page 132 of I ITC and at page 60 of[1966] 60 ITR 52): "as long as the law allows preliminary expenses and goodwill to be treated as assets, although of an intangible nature, the money so spent is in the nature of capital expenditure just as much as money spent in the purchase of land and machinery ". The Chief Justice accordingly held that Rs. 28 lakhs could not be treated as expenditure (not in the nature of capital expenditure) solely incurred for the purpose earning the profits of the company's business. In the case of India Cements [196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee company acquired as a result of issuing bonus shares is for enduring benefit in the commercial sense and such advantage is in the capital field. The test of enduring benefit, therefore, does not break down and the expenditure incurred in connection with the issuance of bonus shares must be held to be capital in nature. Learned counsel for the assessee-company next relied on the decision of the Madras High Court in CIT v. Kisenchand Chellaram (India) P. Ltd. [1981] 130 ITR 385. In that case, the assessee-company paid fees for raising the capital of the company to the Registrar of Companies and claimed the amount paid as a revenue expenditure. This claim was negatived by the Income-tax Officer and the Appellate Assistant Commissioner but upheld by the Tribunal on the ground that the amount was wholly and exclusively laid out for the purpose of the business. The Madras High Court held that without capital a company cannot carry on its business and hence the expenses incurred for increasing the capital was bound up with the functioning and financing of the business. After referring to the decision of the Supreme Court in India Cements Ltd. [1966] 60 ITR 52, the Madras High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee to the Registrar of Companies for the enhancement of capital was an allowable revenue expenditure ? " Question No. 4 Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 31,899 incurred by the assessee during the year in connection with the issue of bonus shares and splitting of shares was an allowable revenue expenditure and not in the nature of capital expenditure ? " Question No. 6: " Whether, on the facts and in the circumstances of the case, the sum of Rs. 5,250 estimated by the Tribunal to be the expenditure incurred by the assessee by way of fees in connection with the issue of bonus shares out of the total fees of Rs. 52,500 was an allowable revenue expenditure and not in the nature of capital expenditure ? " While dealing with question No. 3, the Bombay High Court relying on the decision of the Supreme Court in India Cements Ltd.'s case [1966] 60 ITR 52, dissented from the decision of the Madras High Court in CIT v. Kisenchand Chellaram (India) Pvt. Ltd. [1981] 130 ITR 385 and held that the fees paid by the assessee to the Registrar of Companies for the enhancement of capital was not an allowable revenue expenditure. Mr. Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . machines was of revenue in nature and not of a capital nature for the assessment year 1966-67 ? " The facts relating to this question are that in the previous year relevant to the assessment year 1966-67, the assessee-company incurred an expenditure of Rs. 59,331 which it claimed was incurred for repairing and reconditioning of the existing room to accommodate I. B. M. machines. The Income-tax Officer held that the expenditure was capital in nature inasmuch as the assessee had acquired an advantage of enduring nature in the form of a building capable of accommodating the I. B. M. machines. In the appeal, however, the Appellate Assistant Commissioner came to the conclusion that the amount spent was of a revenue nature and no new asset had been created by such expenditure. The Revenue being aggrieved by the order of the Appellate Assistant Commissioner carried the matter in appeal before the Tribunal. The Tribunal upheld the view taken by the Appellate Assistant Commissioner holding that the expenditure which was incurred for repairing and reconditioning the existing flooring with a view to accommodate I. B. M. machines, cannot be regarded as capital expenditure. It observed tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 33(1)(iii)(c)(a) of the Act as they stood in the assessment years under consideration, the assessee was entitled to development rebate at a higher rate of 35% on machinery used for the purpose of manufacture or production of articles or things covered by item 18 of the Fifth Schedule. The said item read: "(18) Petrochemicals including corresponding products manufactured from other basic raw materials like calcium carbide, ethyl alcohol or hydrocarbons from other sources." The Income-tax Officer held that the assessee-company was entitled to claim development rebate at the higher rate of 35% in respect of machinery installed for production of P. V. C. resin and P. V. C. Plant. So far as remaining machineries or plants were concerned, the Income-tax Officer was of the view that they were not covered by the said item (18) of the Fifth Schedule reproduced above. Under the circumstances, while allowing development rebate at the higher rate for plants at " serial Nos. 2 and 4, referred to above, he rejected the assessee-company's claim for grant of development rebate at that rate in respect of machineries or plant at serial Nos. 1, 3 and 5. Same view was taken for the assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chemical " within those entries. The Tribunal declined to state a case to the High Court and the High Court refused to call for a case on the question whether Nylon-6 manufactured by the respondent was a " petrochemical ". On appeal to the Supreme Court, the Supreme Court dismissed the Department's appeal and held that there was nothing to show that the finding of the Tribunal proceeded on a misapplication of any rule of law or was based on no evidence or was based on inadmissible evidence or that the Tribunal had ignored material evidence or that its finding, on the evidentiary material, was perverse. The question sought for by the Revenue for reference was not, therefore, a question of law. Similar view was taken by the Supreme Court in J. K. Synthetics Ltd. v. CIT [1981] 130 ITR 23 (SC). In the instant case also, the Tribunal has recorded a finding that the machineries or plants in question were used for the purpose of manufacture of articles or things covered by item (18) of the Fifth Schedule to the Act. It is not the Revenue's case that the finding of the Tribunal proceeded on the assumption of any rule of law or was based on no evidence or was based on inadmissible evidence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stances In the affirmative of the case, the Income-tax Appellate Tribunal and against the was justified in law in holding that the expenditure Revenue of Rs. 59,331 incurred by the assessee on repairing and reconditioning the existing room to accommodate I. B. M. machines was of a revenue nature and not of a capital nature for the assessmentment year 1966-67 ? 5. Whether, on the facts and in the circumstances In the affirmative of the case, the Income-tax Appellate Tribunal and against the was right in law in allowing development Revenue rebate at 35% on the PVC processing plant for the assessment years 1966-67 and 1967-68 ? 6. Whether, on the facts and in the circumstances In the affirmative of the case, the assessee is entitled to relief and against the under section 80E of the Income-tax Act, 1961, in Revenue respect of profit attributable to direct sale of PVC resin, which amounted to Rs. 86,25,218 for the assessment year 1966-67 ? Reference answered accordingly with no order as to costs. A copy of this judgment should be sent under the seal of this Court and the signature of the Registrar to the Income-tax Appellate Tribunal, Ahmedabad Bench - - TaxTMI - TMI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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